Trading blows over tariffs: Indian exports may be caught in crossfire

Heavy tariffs imposed by the United States on imported steel and aluminium have sparked fears of a global trade war. While Donald Trump's obvious target is China, Indian exports may be caught in the crossfire.

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MG Arun

Ananth Krishnan

March 22, 2018

ISSUE DATE: April 2, 2018

UPDATED: March 23, 2018 21:55 IST

Illustration by Nilanjan Das

Trade wars are good, and easy to win," tweeted US President Donald Trump on March 2. A day earlier, the Trump administration shocked markets by announcing record high tariffs-25 per cent on steel imports and 10 per cent on aluminium-while his latest Twitter proclamation left diplomats in world capitals, from London to Delhi and Beijing, scrambling. Was it, like past Trump missives, merely bluster or did it signal what much of the world, and especially countries like India and China, has feared since Trump's ascension: a bruising global trade war that could deal a fatal blow to globalisation?

Even before taking office, Trump had railed at "unfair" trade deals, especially at China for "raping" the US economy and jobs. He pledged to tear up multilateral trade agreements as he swept to power on the support of middle America and white blue-collar workers who bore the brunt of manufacturing jobs being shipped overseas in a globalised economy. Trump's first act in office was to sign an executive order withdrawing the US from the Trans-Pacific Partnership (TPP), a trading agreement seen as a counter to China's rising economic prominence. He took to Twitter recently to emphasise that the annual US trade deficit had reached $800 billion (Rs 52 lakh crore) last year.

LOOMING TRADE WAR

The high tariffs on steel and aluminium have already been slammed by US partners-from Canada to the European Union (EU) and Mexico-as well as competitors, such as China. The move has sparked fears of a trade war, should Trump follow through with wider tariffs. His administration has hinted it's considering an annual $60 billion (Rs 3.9 lakh crore) tariff on major Chinese exports to the US, which would prompt retaliation from Beijing. China, its economists say, has the arsenal to do so, from curtailing billions of dollars of American imports-agri products to airplanes-to punishing US companies that are increasingly reliant on the China market, from auto giants to Apple and Starbucks.

What would a trade war look like? American tariffs would first be challenged by affected partners in the World Trade Organization (WTO). The EU has already hinted it might do so with Trump's steel tariffs. The WTO is likely to rule against the US. The EU could take countermeasures, prompting a tit-for-tat that ultimately curbs global trade flows. All of this could render WTO increasingly irrelevant and deal a body blow to global multilateral trading.

That endgame, however, is still way off, experts hope, especially if Trump backs off and, as is his wont, strikes a deal that he could paint as a moral victory to his supporters-for instance, getting major American partners to make modest pledges to reduce their trade surplus. That is at least what dealmakers in Beijing are banking on. "I don't think a full-fledged trade war will happen," says economist Xu Bin of the China Europe International Business School in Shanghai. "China will avoid direct confrontation and will look to have less exports and more investment in less sensitive industries. Trump's ultimate interest is winning the 2018 mid-term elections and being re-elected in 2020. His base is blue collars in the traditional manufacturing industries, and China could promise investments there."

While many think Trump's recent missives are aimed at countries with which the US has a trade deficit of over $30 billion (Rs 1.95 lakh crore), there is hope that a middle ground will be reached in due course. However, in the interim, the world can expect a heightened war of words and brinkmanship, and a series of challenges in the WTO against US policies that potentially hurt the target nations. For instance, India could challenge a complaint by the US that the former's export subsidy programmes are harming American workers. Such subsidies, which India says are export 'incentives', amounted to $7 billion or Rs 45,600 crore. China can afford to shrug off the steel tariffs since its steel exports to the US are just around 4 per cent of total US imports of the commodity. But it may view seriously any move to impose restrictions on bigger exports, such as electrical machinery, and take retaliatory measures.

INDIA'S CONCERNS

Experts in India's industry and trading community caution against complacency in the current circumstances. "Trump seems to be clutching at last straws to appease his domestic voters," says Biswajit Dhar, professor of economics at Jawaharlal Nehru University, New Delhi. However, this is not the first time in the recent past that the US has targeted India on trade issues. "In 2014, the US International Trade Commission launched an investigation into India's trade and investment policy to identify areas where the policy has been hurting the US," says Dhar, urging New Delhi to raise the matter on international forums. "India should not be cowed down by such tactics. The US is likely to come up with certain intellectual property rights issues as well, in the future. India should approach the WTO against this move as it would severely hit global trade."

Statistics from the Office of the United States Trade Representative say India is the ninth largest exporter into that country. The US imported $74.9 billion (Rs 4.8 lakh crore) worth of goods, services and agricultural products from India in calendar year 2016, while its exports to the country were only $43.3 billion (Rs 2.8 lakh crore). This means a bilateral trade deficit of $31.6 billion (Rs 2 lakh crore). The top imports from India in 2016 were precious metals and stones ($11 billion or Rs 71,500 crore), pharmaceuticals ($7.4 billion or Rs 48,100 crore), mineral fuels ($2.4 billion or Rs 15,600 crore), miscellaneous textile articles ($2.3 billion or Rs 14,950 crore), and machinery ($2.1 billion or Rs 13,650 crore).

Ajai Sahai, director general and CEO of the Federation of Indian Export Organisations (FIEO), says the combined steel and aluminium export from India to the US was worth $1.5 billion (Rs 9,750 crore). This is miniscule considering India's overall exports to the US. "However, India needs to tread carefully and should communicate to the US in a productive way," says Sahai. The bigger target for the US, according to him, is China, with which it has a trade deficit of $308 billion (Rs 20 lakh crore). On the other hand, India's trade surplus with the US will shrink considerably over the next two years as it gets supplies from Boeing of aircraft ordered by domestic carriers. "India has ordered defence equipment, which is not captured in trade data," adds Sahai. He recalls that trade restrictions imposed in 2002 during the George W. Bush regime-30 per cent tariff on imported steel-had been counterproductive to US companies. "Once tariffs were raised, the industry jacked up prices and users of imported inputs suffered," says Sahai.

Jayanta Roy, senior vice president at ratings agency Icra, agrees that higher US tariffs might not trouble Indian steel exports. "India's steel exports to the US market were a meagre 0.7 million tonnes (MT) in calendar year 2017, accounting for less than 1 per cent of India's domestic demand," says Roy. "Indian steel mills should be able to find an alternative market for the nominal US export volumes without much difficulty."

Icra feels the import tariff on steel may not have a significant impact in the medium term for three reasons. First, global steel demand (barring the US) is expected to increase by 25 MT in calendar year 2018, and a part of the affected volumes could be absorbed in other geographies, especially the emerging/ developing economies. Second, Chinese steel exports have been steadily declining, from 112 MT in 2015 to 75 MT in 2017-the trend is expected to continue in 2018 on the back of a resilient domestic demand and proposed steel capacity cuts. So, other steel exporters (like India) are likely to fill up the supply vacuum left by China by diverting volumes from the US. Third, in 2017, domestic steel mills in the US operated at 74 per cent capacity. Even if capacity utilisation improves significantly in 2018, it would still require around 10 MT of steel imports from non-exempt countries.

Meanwhile, Trump found unexpected support from Sajjan Jindal, chairman of JSW Steel, one of India's largest steel producers. "What @POTUS (official Twitter handle of the US president) has done is something our policymakers should replicate. Steel should be excluded from all FTAs (free trade agreements)." Jindal's tweets were aimed at China which, he said, has a surplus production of about 15 per cent, which it uses to "disrupt the steel industry the world over by dumping cheap quality steel".

The tariff on aluminium, too, imposed by the US, would not majorly impact the global aluminium industry, say experts. The global market is in a deficit after China's regulatory measures to curb production from its polluting and 'illegal' aluminium smelters. Hence, the world, outside the US, can absorb the aluminium exported from countries impacted by the tariff. The US has filed a complaint at the WTO about India's export subsidy programmes, such as the Merchandise Exports from India Scheme, Export Oriented Units Scheme, Electronics Hardware Technology Park Scheme, Special Economic Zones, Export Promotion Capital Goods Scheme, and a duty-free imports for exporters programme. The US says the incentives violate WTO agreements as India is no longer below the economic benchmark of $1,000 per capita gross national income. "The export subsidy programmes harm American workers by creating an uneven playing field," said US Trade Representative Robert Lighthizer, pegging the subsidies at $7 billion (Rs 45,500 crore).

India has countered the argument. "It will be an irresponsible statement... because we are interested in selling to each other," commerce secretary Rita Teaotia said, according to media reports. There would, however, be no knee-jerk reaction by New Delhi, she added. "We will actively engage with them," she said, pointing out that India has eight years to graduate out of the subsidy regime. "We hope they will recognise this time frame, and during it, we will commit ourselves and meet our obligations."

Trump has frequently raised the issue of high import tariffs (100 per cent, subsequently cut to half) on Harley-Davidson motorcycles in India. In February, referring to a conversation with Prime Minister Narendra Modi, Trump said the "fantastic man" informed him that India has reduced tariffs on imported motorcycles, but the US was "getting nothing".

Dhar says even if Indian exporters face challenges in the US market, they should be able to identify newer markets. The government should take steps to support them, including lower transaction costs, single-window clearances, short-term insurance and market development. GST, though, has not been exporter-friendly, he says.

According to industry body Assocham, given that India's imports are higher than exports, there isn't much space to retaliate as most imports were unavoidable. "The best course would be to keep engaged with major trading partners, without aligning ourselves too much into a single bloc. Wherever our exports are affected, we must engage bilaterally and use the WTO channel in a rule-based manner," Assocham said in a statement. India is likely to end the current fiscal with a hefty import bill of $450 billion (over Rs 29 lakh crore) against exports of about $300 billion (Rs 19 lakh crore), it added.

THE CHINA FACTOR

Many of Trump's trade moves are ultimately aimed at China-the biggest American trading partner-even if his steel and aluminium tariffs, peculiarly, will have little impact on Beijing. In China, the steel tariff announced by the US caused some puzzlement as it affects US allies more. China's share of US steel imports is declining, now under 4 per cent and far less than that of the EU (21 per cent), Canada (17 per cent), South Korea (9 per cent), Brazil (8 per cent), Mexico (8 per cent) and Japan (5 per cent). "Steel tariffs will do more harm to countries like Japan, Germany and South Korea," says economist Xu Bin. But what worries China, Xu says, is that "Trump is not going to stop with steel, and this was possibly picked up to test the waters".

The prospect of the $60 billion tariff has not gone down well with American companies. "The administration is right to focus on the negative economic impact of China's industrial policies and unfair trade practices, but the US Chamber would strongly disagree with a decision to impose sweeping tariffs," said US Chamber of Commerce president Thomas J. Donohue. "Tariffs are damaging taxes on American consumers. Tariffs of $30 billion a year would wipe out over a third of the savings American families received from the doubling of the standard deduction in tax reform. If the tariffs reach $60 billion, which has been rumoured, the impact would be even more devastating and could lead to a destructive trade war with serious consequences for US economic growth and job creation."

Beijing is looking to pre-empt such tariffs, Xu says, by trying to reach a compromise. It can retaliate with tariffs on major American imports that could be sourced elsewhere-grains and seeds, aircraft and machinery. For the latter two, Europe would more than willingly fill the void, especially as China and the EU have sought to make common cause on Trump's tariffs. In a March 14 telecon, Chinese President Xi Jinping and German Chancellor Angela Merkel pledged "closer cooperation" to promote "globalisation and multilateralism". American tariffs, some Chinese economists say, would hurt China far less than a decade ago as it's less reliant on exports and manufacturing now. "A tariff on electrical equipment would hurt Apple as much as China," says economist Li Wei at the Cheung Kong Graduate School of Business in Beijing. "In a globalised world, you cannot easily target one country without larger consequences."

Li says China could retaliate through the WTO, and by making common cause with countries such as Germany and India that have a lot to lose from a weakened global trading regime. This was even suggested by President Xi to PM Modi in a March 20 telecon, where he described India and China as "staunch forces to promote world multi-polarisation and economic globalisation". "The system Trump is looking to undermine was created by the US after World War II," says Li. "The system is not perfect, but if Trump starts a trade war, the best response would be for the world to unite to preserve what America created."

At the moment, countries seem to be more in a conciliatory mood in their reaction to Trump's measures, but nothing can be left to chance. While solutions to some of these issues would be reached through mutual talks, countries like India will also need to frame an apt response to charges of high subsidy schemes, and counter them at the right forum. Otherwise, similar trade issues would keep raising their head, threatening to undermine economies that look for a bounceback through higher exports.

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